Steve H. Hanke
On March 3, 2014, the United States went to war with Russia. That’s when the U.S. first imposed sanctions. And, yes, sanctions are nothing more than war by non-military means. Then, on November 11 Russia committed a major misstep. It floated the ruble. Since then, the ruble hasn’t floated on a sea of tranquility. It has plunged in lockstep with oil — by about 25% and its volatility has soared to around 65%.
The ruble’s plunge means that Russian imports will be more expensive and exports more competitive. This combination will help keep Russia’s current account positive, which will offset some of Russia’s massive capital flight.
“A currency board, rather than a floating ruble, would protect Russia from the specter of inflation.”
In addition, Russia’s fiscal accounts are denominated in depreciating rubles and its oil exports are invoiced in appreciating U.S. dollars. So, the fiscal blow from lower oil prices will be cushioned by a weak ruble.
But, there are limits to any temporary benefits from a ruble rout. When a currency takes a dive, the specter of inflation is always right around the corner. How can Russia avoid further damage and correct for its error of November 11?
Russia should abandon the floating exchange-rate regime, which it adopted on November 10. Oil and other commodities that Russia exports are priced and invoiced in U.S. dollars. By embracing a floating exchange-rate regime, Russia is inviting instability. The ruble’s nominal exchange rate will fluctuate with oil and other commodity prices. When the price of oil rises (falls) the ruble will appreciate (depreciate), and Russia will experience a roller-coaster ride distinguished by deflationary lows and inflationary highs. To avoid these wild rides, most of the big oil producers — Saudi Arabia, Kuwait, Qatar and the United Arab Emirates — link their currencies to the U.S. dollar. Russia should do the same.
To get things right, Russia should lift a page from John Maynard Keynes’ Russian playbook and establish a currency board.
Under a currency board system a central bank issues notes and coins. These are convertible into a foreign reserve currency at a fixed rate and on demand. As reserves, the monetary authority holds high-quality, interest bearing securities denominated in the reserve currency. Its reserves are equal to 100 per cent, or slightly more, of its notes and coins in circulation, as set by law. A central bank operating under a currency board rules does not accept deposits and it generates income from the difference between the interest paid on the securities it holds and the expense of maintaining its note and coin in circulation. It has no discretionary monetary policy. Instead, market forces alone determine the money supply.
There is an historical precedent in Russia for a currency board. After the Bolshevik Revolution, when troops from Britain and other allied nations invaded northern Russia, the currency was in chaos. The Russian civil war had begun, and every party involved in the conflict was issuing its own near-worthless money. There were more than 2,000 separate issuers of fiat rubles.
To facilitate trade, the British established a National Emission Caisse for northern Russia in 1918. The Caisse issued “British ruble” notes. They were backed by pounds sterling and convertible into pounds at a fixed rate. Kurt Schuler and I discovered documents at the archives in the British Foreign Office which prove that the father of the British ruble was none other than John Maynard Keynes, who was a British Treasury official at the time.
Despite the civil war, the British ruble was a great success. The currency never deviated from its fixed exchange rate with the British pound. In contrast to other Russian rubles, the British ruble was a reliable store of value. Naturally, the British ruble drove other rubles out of circulation. Unfortunately, the British ruble’s life was brief: The National Emission Caisse ceased operation in 1920, after allied troops withdrew from Russia.
Yes, it is time for Putin to lift a page from Keynes and follow what most large non-U.S. oil producers already do: link the ruble to the greenback.Steve H. Hanke, Professor of Applied Economics at Johns Hopkins University, is a Senior Fellow and Director of the Troubled Currencies Project at the Cato Institute.
Ted Galen Carpenter
There is a flurry of news media accounts that the United States and Cuba are in talks to restore diplomatic relations. One hopes that such negotiations prove fruitful, thus ending a quarrel that has lasted some fifty-five years and benefited neither country. Restoring diplomatic ties would pave the way for ending the long-standing U.S. economic embargo against the island nation, and that move could be the catalyst for a commercial bonanza. Cuba would become a vacation destination for tens of thousands of American tourists, as it was in the decades before Fidel Castro’s communist revolution. The route between Miami and Havana could become a busy air corridor for commercial flights. Thousands of Cuban exiles and their families in the United States have a powerful incentive to travel back to the island for both business and personal reasons. Without the arbitrary interference resulting from the diplomatic feud and the accompanying U.S. embargo, the two countries are natural economic partners.
Cuba would be the principal beneficiary of normalizing relations. The opening of trade and investment with the vast U.S. economy would make it possible for Cuba to enter the twenty-first century. No longer would images of the island be those of a country stuck in a time warp, with the streets of Havana and other major cities currently being notable for the presence of automobiles from the 1940s and 1950s. Although economic mismanagement by Castro and his associates is the principal reason for that unhappy development, U.S. hostility and the vindictive policies it generated also have played a major role. Normalization of relations would enable Cuba finally to become something more than a large used car museum.
“A willingness to restore diplomatic ties with Havana suggests that perhaps the suffocating Wilsonian approach to U.S. diplomacy may finally be weakening.”
But while Cuba would benefit greatly from the end of the bilateral cold war with Washington, the United States would also benefit. The economic gains to America, while relatively modest in the context of a $17 trillion-a-year economy, would be significant. More important, though, normalizing relations with Havana could be an important step in ending a counterproductive approach in overall U.S. foreign policy that has lasted for more than a century.
Until the administration of Woodrow Wilson, the United States generally had a practical, straight-forward approach to relations with foreign countries. Washington maintained diplomatic ties with numerous governments, most of which were something other than democratic republics. U.S. officials did not predicate the existence of diplomatic relations on approving the nature of specific foreign regimes.
Wilson and his ideological disciples added a new, and quite harmful, dimension to America’s diplomacy. From time to time, Washington implicitly insisted that other governments have an appropriate level of moral purity before the United States would officially recognize their existence and maintain diplomatic relations. That standard was never applied consistently, but when it was invoked, U.S. leaders clung to official policies that were often detached from any semblance of reality.
For example, the United States refused to have official dealings with Moscow for more than fourteen years following the Bolshevik revolution, until Franklin D. Roosevelt finally abandoned that approach. Washington reacted in the same stubborn fashion after the 1949 communist revolution in China. It was not until President Richard Nixon and his chief foreign-policy adviser, Henry Kissinger, mustered the courage to pursue a rapprochement with Beijing in the early 1970s that U.S. policy began to align with reality. And it was not until 1979, during Jimmy Carter’s administration, that Washington and Beijing finally established official diplomatic ties. Until the policy shift in the 1970s, a succession of U.S. administrations persisted in the fiction that Chiang Kai-shek’s Nationalist regime on Taiwan was the legitimate government of all China. In other words, U.S. officials insisted on the absurd fiction that an exile regime on an island of 20 million people spoke for a country of nearly one billion people.
That perverse diplomatic approach has occurred in other arenas. It took Washington more than two decades after the end of the Vietnam War to establish diplomatic relations with Hanoi. To this day, the United States refuses to recognize the government of North Korea, even though that communist regime has been in power since the late 1940s. And official relations between the United States and Iran—a crucial, midsize power in the Middle East—have been nonexistent since 1979.
A willingness to restore diplomatic ties with Havana, combined with the ongoing talks with Iran on that country’s nuclear program and an assortment of other regional issues, suggests that perhaps the suffocating Wilsonian approach to diplomacy may finally be weakening. One can only hope that is the case. Wilsonianism is akin to someone on a middle-school playground taking the stance: “I don’t like you, and I’m not going to play with you.” That approach generally doesn’t work well on the playground, and it definitely doesn’t work well in the international arena. Talks with Cuba indicate that perhaps the Obama administration has internalized that lesson.Ted Galen Carpenter, a senior fellow at the Cato Institute and a contributing editor at The National Interest, is the author of nine books, the contributing editor of ten books, and the author of nearly 600 articles and policy studies on international affairs.
President Barack Obama used negotiations over bringing home a couple of imprisoned Americans as an opportunity to refashion the entire U.S.-Cuba relationship. He’s aiming to reopen the embassy, relax trade and travel restrictions, and improve communication systems.
Of course, sustained caterwauling began immediately from the usual suspects, hardline Cuban-Americans, Republican neocons and uber-hawks, and obsessive Obama-haters. The president wasn’t just aiding the Castros. He was hurting America, they claimed.
For instance, potential 2016 presidential contender Sen. Marco Rubio of Florida declared: “Appeasing the Castro brothers will only cause other tyrants from Caracas to Tehran to Pyongyang to see that they can take advantage of President Obama’s naiveté during his final two years in office. As a result, America will be less safe as a result.”
It’s an astoundingly silly claim. If Sen. Rubio hasn’t noticed, America has engaged in years of on-and-off discussions with North Korea’s Kim dynasty stretching back to the Clinton administration. Under President Obama Washington has been negotiating with Iran’s government for months: most people recognize that a diplomatic settlement, no matter how difficult to achieve, would be better than war. And it’s hard to fathom exactly how the national wreck known as Venezuela could hurt the U.S.
Yet Rubio and others charge the administration with appeasement and even surrender.All because the president is proposing to treat Cuba like the U.S., under Republican as well as Democratic administrations, treats China, Vietnam, Uzbekistan, Eritrea, Saudi Arabia, Egypt, and a host of other repressive states. President Obama suggests that government officials talk to one another. And that peoples visit and trade with one another. Nothing more.
Republicans once attempted to present themselves as the Daddy Party, the serious folks who got things done and accepted the world as it was, rather than treated it as they wished it to be. They set priorities and made tough choices. They adapted their approach as circumstances warranted. And they adopted policies which actually achieved what the stated objectives.
Well, no longer, if ever. And certainly not in Cuba today.
“If conservative Republicans believe in recognizing reality and getting results, as they claim, they should back trade and engagement with Cuba.”
More than a half century ago Fidel Castro took power in Havana. In the midst of the Cold War the Kennedy administration understandably feared that Cuba would serve as an advanced base for the Soviet Union, as evidenced by the Cuban Missile Crisis. Moreover, Soviet aid could both sustain Havana and enable it to spread revolution elsewhere in the region. Having tried and failed to overthrow the regime militarily, Washington saw an economic embargo as the next best option.
But that didn’t work either. Even after the Soviet Union collapsed and Moscow ended subsidies for Cuba, sanctions achieved nothing. The Communist system tottered along, with 1950s U.S. cars held together with wire and tape, buildings looking like they were last painted during the Jurassic Period, and food in short supply. But where Americans would not trod others cheerfully brought their money. When I visited Havana (legally) a decade ago, my journalism group stayed at a Dutch hotel. Dollar stores for those with access to “hard” currency were filled with foreign goods and Fidel Castro reluctantly allowed private business—it was easy to find restaurants with good food if not fine furnishings. And individual Cubans were eager to talk, and especially to cadge a few bucks off foreign visitors.
Today the system continues to stagger along. Fidel alive but in retirement. Raul in charge, but nearing the end of his rule. Low-key political purges mixed with limited economic reform. Everyone assumes the system cannot last much longer, but two decades ago people were saying the same thing when the U.S.S.R. left Cuba. The only certainty is that economic sanctions have failed.
Failed to bring down the regime. Failed to spark a second revolution. Failed to liberalize the system. Failed to free any political prisoners. Failed to initiate open elections. Failed to shift the Castros’ allegiance from Moscow, Caracas, and other anti-American regimes. Failed to win the return of nationalized assets. Failed to prevent foreign investment. Failed to transform the economy. Failed to isolate Cuba. Failed to achieve much of anything useful, at least.
After more than 50 years.
But that should surprise no one, least of all free market conservatives. Sanctions are most likely to work if they are universal and narrowly focused. For instance, a detailed study by the Institute for International Economics of 120 cases figured about a one-third success rate for economic sanctions. However, even that overstated their efficacy. They did best with limited objectives, such as destabilization and disruption (economic consequences of economic action) or “modest” policy change (small political concessions due to economic action).
For instance, the U.N.-approved ban on oil sales by Iraq was vastly more effective than America’s commercial restrictions on Cuba, yet even the former was hard to enforce. Moreover, limits on Iraqi oil sales were designed to cut Baghdad’s revenue, not end Saddam Hussein’s rule. Voluntary regime change is unknown, with governments more likely to treat sanctions as war and strike out if they have the means to do so, such as Japan in 1941.
The latter point is critical. A Government Accountability Office review noted that “sanctions are more effective in achieving such modest goals as upholding international norms and deterring future objectionable actions” than in forcing major changes, such as committing political suicide. Get most everyone in the world to insist that Havana behave a certain way in a specific circumstance on a discretionary issue, it might agree. Unilaterally demand that it hold free elections, release political prisoners, return property, allow an opposition press, okay foreign ownership, and permit public demonstrations? Get real. For the regime, sanctions obviously are the lesser evil.
It’s the same elsewhere. U.S. and European commercial restrictions, in conjunction with the sharp drop in oil prices, are imposing real harm on the Russian economy and its people, but the Putin government isn’t likely to retreat from policies in Ukraine which it views as vital. The North Korean regime has withstood years of Washington-led impositions, maintaining political repression and developing nuclear weapons, both considered to be foundations for its system of monarchical communism. International sanctions have helped push Iran to negotiate over its nuclear program, but diplomacy has gotten this far, and still may fail, only because the West is united and not demanding political surrender.
Yet for a half century Washington has been insisting that the Castros dismantle their Communist dictatorship. A great goal and the right choice for the Cuban people. But until Havana’s Gorbachev appears, it ain’t going to happen, whatever sanctions the U.S. imposes.
The embargo also is advanced as moral recompense, punishing dictators and thieves, the Communist revolutionaries who oppressed the Cuban people and stole their property, or at least that of many people who fled to Florida. Of course, the same could be said of most every other government arising from revolution, insurrection, coup, putsch, and sometimes even election. Democratic governments are known sometimes to seize property without adequate compensation. (Even the U.S. authorities have been known to do so!) Why single out Cuba, other than the politics of Florida?
Moreover, if Raul Castro & Co. is being punished, those in charge don’t seem to notice. General embargoes hurt average folks far more than elites, who are most able to manipulate the system. This led to the famous question about what justified the death of a half million Iraqi babies put to then-U.N. Ambassador Madeleine Albright (who callously responded: “We think the price is worth it”). In 1998 I met Zoran Djindjic, head of the Democratic Party and opponent of Yugoslavian dictator Slobodan Milosevic. Djindjic, later assassinated as prime minister, criticized Western sanctions, which led “to centralization of the management of the economy.” The politically well-connected took advantage of the restrictions while his followers couldn’t even afford gasoline to drive to a rally, he explained.
The embargo also has provided the regime with a wonderful excuse for its failings. Even though plenty of investment funds and trade opportunities are available with the rest of the world, the Castros could always point to Yanqui Imperialism as the cause of the Cuban people’s travails. Never mind collectivist economic policies which have failed everywhere else in the world. Blame the embargo! It’s why many Cuban dissidents were not much enthused with sanctions. Some regime opponents, such as Elizardo Sanchez Santa Cruz, who I met on my trip a decade ago, criticized U.S. policy.
Perhaps the worst consequence of the embargo, however, was helping to turn a murderous windbag into a towering international figure. Fidel Castro never much mattered because Cuba never much mattered. With good government and liberal economics the island would become a prosperous vacation haven. But it’s hard to imagine what a hostile Cuba could achieve on its own. Visualize Cuban hordes conquering the Caribbean, let alone the world. Nah!
Castro’s relationship with the Soviet Union made him dangerous, but that was resolved by the settlement to the Cuban Missile Crisis. After that his government intervened to varying degrees elsewhere, such as in Africa, but Havana’s activities had minimal effect and were little different than those conducted by Moscow. He became a symbol of resistance to America only because Washington focused attention on him. Ignoring him and flooding his island with tourists and businessmen would have denied him his global podium and claim of victimhood.
Encouraging travel and trade would promote regime change better than all the money spent on Radio Marti. There’s no need to oversell the political impact of commerce. Political tyranny is difficult to overthrow, even when everyone knows the system is a grotesque fraud and failure. But it’s hard to name a dictatorship anywhere ended by isolation. And if the latter policy hasn’t worked for 50 years in Cuba, it’s time to try something else.
Perhaps most disappointing is how fevered embargo advocates never let the facts get in the way of their arguments. Impose an embargo on Communist Cuba when it appears to pose a security threat and other countries are willing to back your approach. But don’t steadily ratchet up restrictions as everyone else shifts to engagement. And admit after a half century that sanctions have failed to achieve any of your objectives.
Then back away gracefully. Don’t act as if your policy would work if just given a little more time—say another 50 years or so. And don’t shout expletives at your opponents, as if letting people trade and travel was an unheard of concession never before imagined in the world.
There are plenty of good reasons to criticize President Obama and his cast of liberal but incompetent hawks. However, he’s got Cuba policy right, in contrast to Marco Rubio, Jeb Bush, and most of the cast of GOP presidential wannabes. It long ago was evident that the embargo had failed and deserved to be repealed. (And that America’s embassy should be reopened, as the president also has proposed.) If conservative Republicans believe in recognizing reality and getting results, as they claim, they should back trade and engagement with Cuba.Doug Bandow is a senior fellow at the Cato Institute. A former special assistant to President Ronald Reagan, he is the author of several books, including Foreign Follies: America’s New Global Empire. (Xulon Press).